Real estate investors typically seek foreclosed or older homes because they come at a good price. But often times, these types of homes require a little (sometimes a lot) of love. At the end of the day, the work you put into your rehab property should generate a considerable return on investment. So, how does one determine if they should rehab to rent or rehab to sell?
Let’s find out.
There are some pros and cons to both rehab to rent and rehab to sell. It is all really dependent on what you are looking for and what you want out of the investment.
Rehab to Rent
Rental properties are considered long-term investments. Up front, rehabbing a property to rent is typically less expensive than rehabbing a property to sell because your focus is on functionality and durability which means you’ll keep material costs to a minimum and invest in features that’ll withstand wear and tear. Other benefits include having a steady stream of income, as long as the property doesn’t go or stay vacant for a long period of time. You will have control over the monthly income.
However, rehabbing to rent also comes with some concerns as well. You will be required to maintain and manage the tenants and property, it may difficult to refinance, you may face higher interest rates and low appraisals on the after-repair value.
Rehab to Sell
Rehab to sell, or fix and flip, is more of a short-term investment. Once the renovations are done and the house is sold, you’ll get cash and be completely absolved of your responsibilities. However, it will require more money upfront. You’ll want to upgrade features so that it is competitive and can sell at a good price.
There is also the state of the real estate market to consider when fix and flipping. Sometimes it’s just the perfect time to sell and sometimes there will be things beyond your control. Another consideration is the taxes. If the house sells and settles in less than one year after you purchased it, you will have to pay higher taxes or the short-term capital gain tax. Simply owning it for a year and a day could help cut those taxes in almost half since then it becomes a long-term capital gain.
The process of rehab to rent and rehab the sell will most likely be the same, but you should determine your exit strategy before going into the project. Do your research on location of your property and current market trends. With a variable real estate market, you should always be prepared to shift your strategy.